For GCC governments the oil price has been at a depressingly low level for more than a year now, and there isn’t much hope of a recovery any time soon. That has obvious implications for budgets, government spending plans and the overall health of the economies and, of course, for the region’s banking systems. The longer the oil prices continue to stagnate, the greater the potential effects on Gulf banks.

There may not be many winners among the region’s lenders as a result, but there are certainly some that are more vulnerable than others. It may seem counter-intuitive or just plain unfair that some of the countries with the largest oil and gas reserves should be least affected by the slump in energy prices, while others are being hammered, but that is certainly the case when it comes to the Gulf.

The economies of Kuwait and Qatar, for example, are relatively well placed to withstand the low oil prices environment, although for rather different reasons. In Kuwait’s case the under-spending by the government over the past few decades means that it has relatively small outgoings and ample savings. As a result, it finds it easier than most to sustain its spending patterns.

Qatar, on the other hand, has been able to ride the wave of high oil and gas prices to develop its economy, but still benefits from a low cost of energy production. The upshot is that the banking systems in both countries are fairly well placed to withstand the current difficulties.

“The Kuwait and Qatar banking systems are likely to be the least immediately vulnerable [to low oil prices] given their sovereigns’ very low fiscal breakeven oil prices and large reserve buffers,” says Khalid Howladar, a senior credit officer at ratings agency Moody’s. “These twin strengths will allow them to moderate the effects of a protracted decline through continued public spending, thus helping support their economies and banking system fundamentals. Nonetheless, we still expect subdued asset growth.”

In other corners of the region the picture is rather more mixed. In August, Fitch Ratings downgraded five banks in Oman, citing the weakening environment there and the reduced ability of the government to support the banks. This didn’t go down well with local bank executives who said that it didn’t reflect the intrinsic strengths of the banking system. “It’s annoying and not reflective of the banks’ core stability,” says one senior banking executive in Muscat.

The executive has a point. Omani banks have posted healthy growth rates in terms of overall assets, deposits and loans over the past year, even as the oil price was slumping. And a recent review of the system by the Central Bank of Oman found no problems. In its latest financial stability report, issued in June, the central bank said that a series of stress tests “indicated that the banking sector was also well placed in Oman, and that there were no imminent problems or threats to the sector”.

At the time Dr Qais al Yehyei, the head of the Financial Stability Department at the Central Bank, said that the “Omani macro-financial system looks sound”.

It will be harder to sustain strong growth rates going forward however. As governments try to cope with lower revenues they will be forced to cut their spending, run down their savings and realise the investments of their sovereign wealth funds. Even then, budget deficits are expected to rise, requiring the issuance of debt to cover the shortfall. All that suggests a period of lower liquidity and potentially higher cost of funds for banks. Other signs to look out for include slower loan growth and rising levels of non-performing loans.

Alongside Oman, Bahrain’s banking sector is the most vulnerable in the region. In the case of both countries, this stems from the weak position of the sovereigns, which makes it harder for them to offer meaningful support to their banks, even if their desire to do so hasn’t really changed.

“There is a strong track record of sovereign support in [the GCC] countries,” says Redmond Ramsdale, a director at Fitch Ratings. “We don’t see any change in the sovereign willingness to support banks. However, clearly ability has changed or is changing.”

Signs of a slowdown are also starting to become apparent in Saudi Arabia, where loan growth has decelerated this year. According to Fitch, total loans were up by an annualised 10 per cent in the first half of this year, compared to 17 per cent for the first half of 2014. Fitch says it expects credit demand to hold steady at these lower levels for the rest of this year and then to decline again next year.

In early September, Fitch revised the outlook on four large Saudi lenders, Al Rajhi Bank, National Commercial Bank, Riyad Bank and Samba Financial Group, from stable to negative, following a similar adjustment of its rating for the Saudi government.

“We are starting to see the beginnings of pressure on the Saudi banks from this tougher operating environment,” says Ramsdale. “We’re seeing a slowdown in growth rates. This could start to reflect in some deterioration over the next 18 months in sectors such as contracting and construction [and it] could filter down into retail segments. The slower loan growth could impact on profitability improvements. However, we do expect banks to find some efficiency [gains] over the next two years to compensate.”

This analysis of the Saudi banking sector is one that is broadly shared by the IMF. In a report on the country’s economy released in September, the IMF warned that non-performing loan rates in Saudi Arabia are likely to rise in the current tougher environment. Sectors that it thinks look particularly vulnerable include construction, commerce, and manufacturing, which account for 40 per cent of total bank lending in Saudi Arabia and where activity is closely linked to the oil cycle. The IMF also noted that deposit growth has been slowing, from an expansion of 13.5 per cent last year to 10 per cent by May this year.

The UAE is also feeling the effects. In April Standard & Poor’s revised its assessment of the economic risk trend for the UAE banking system to stable from positive, saying that it believed the cycle of improving asset quality and declining credit losses for banks in the country had come to an end.

The risks surrounding higher interest rates are a further potential source of trouble for the region’s banks. There has been speculation for some time that the US central bank, the Federal Reserve, is preparing to increase its rates. That rise failed to materialise in September as some had expected, but it will inevitably happen at some point. Given the pegs that the Gulf currencies have to the dollar, the authorities in the region would almost certainly be forced to follow with rate rises of their own if and when the Fed takes such action.

London-based Capital Economics is forecasting that the Federal funds rate will be 2.25-2.50 by the end of next year, up from 0-0.25 per cent at present. Jason Tuvey, Middle East economist at the firm, says that will lead to slower credit growth across the Gulf as corporate and household borrowing costs begin to rise. “Government borrowing costs are also likely to increase, a concern for countries such as Saudi Arabia, which are just starting to issue debt in order to finance large budget deficits,” he says.

In May, the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, issued a report in which it warned that a one per cent rise in the local interbank rate, known as SIBOR, would lead to a fall in GDP growth rates and declines in the levels of investment and consumer loans.

However, any concerns over interest rates are secondary to the issue of just how long oil prices stay low and the extent to which governments are willing and able to maintain spending levels in the face of reduced revenues. “The onset of rate hikes by the US Federal Reserve provides another reason to expect growth in the Gulf to slow in the coming years. However, low oil prices pose a much greater threat to the outlook,” says Tuvey.

For all the troubles, however, banks in the region are reasonably well positioned to weather the storm. Most are well capitalised and provisions for non-performing loans are often high. As yet, there has not been much sign of government deposits being withdrawn from the banking systems and asset quality is still strong, according to Ramsdale.

“Overall, GCC banks have strong capital and liquidity buffers, which act as mitigants to rating downgrades. The buffers will be pressured over time but we think that they’re strong enough to withstand it certainly over the next 18 months to two-year time horizon,” he says.

For now at least, it seems that enough lessons have been learnt from previous downturns. “All in all, we believe Gulf banks are generally well-positioned to face the emerging risks of the gradual turnaround in operating conditions,” says Timucin Engin, a credit analyst at Standard & Poor’s.